Basic Terms in Stock Market

 

So before you begin the journey of stock investment there are few terms which you should know. Otherwise, it would be a situation, in which you went to play a sport without knowing the ground rules of it. You know the result if that happen.

We would be discussing on :

  • 52 weeks high/low
  • Eps(Earning per share)
  • PE Ratio
  • Market Cap
  • Book Value
  • Face Value
  • P/B Ratio

 

52 week high/Low:

52 week high is basically the highest price which a stock has achieved in a year or 52 weeks (as a year consists of 52 weeks), Similarly, 52 weeks low is the lowest price which the stock has traded in a year. You can refer to list of 52 weeks high/ low from here .

An investor usually makes assumptions about 52 weeks high/ low. If a stock is at 52 weeks high, people assume that the stock in consideration is overvalued without considering fundamentals. While at 52 week low, the same set of people think “Hey it’s at the bottom it cannot go any lower than this “.

In both scenarios, Investors forget to think about very basic fundamentals. If a stock is at the top or 52 weeks high, the stocks’ company must be doing something productive, whereas when a stock is at the bottom or 52 weeks low, there must be something wrong with the fundamentals or the stocks’ company.

So Beware, Don’t make assumptions about 52 weeks high/low.

 

Earning Per Share(EPS):

EPS is net income divided by the total number of public or outstanding shares.

When we calculate EPS, generally we get the weighted average EPS as the number of outstanding shares keeps on changing.

Weighted EPS  = (Net Income – Dividend )/No of outstanding share

 As EPS is an important valuation parameter in determining profits per share basis

Higher the EPS better the Profitability of the company.

A company’s stock with consistent growth in EPS (YOY) is considered to be good for the investment.

  • When EPS grows, stock price follows and moves up.
  • When EPS diminishes, stock price also falls.

Top companies with high Earning per share from past few years.

 

Few more companies who gave consistent growth in short period

You can get complete list from here

 

PE ratio:

Whenever we go to buy something in Market, we generally check the price on Different places to get the best deal. And we use that information to bargain for the best price. Similarly, we have an indicator price to earning ratio in stocks to guide you.

PE  =  Market Price /  EPS

It is basically the ratio of market price to Eps, So it shows “How many times of the earning per share is the market price”. I get it, you are bit confused. Let me explain with an example.

Let say you have bought a cup for Rs 50 each and you sell it to a shop for Rs 100. So the earning per cup is Rs 50. And Rs 100 is the market price.

So, in this case, PE ratio is 2, as market price 100 divided by earning per cup 50.

Different sector have different PE range, for example, Technology Sector has PE range from 18 to 24 while the Textile sector has PE range from 8 to10.

When we use PE we compare with Industry PE (it is calcuated by Averaging PE ratio for all the peer Companies in an industry). Now Industry PE is used as a benchmark to compare valuation a company’s stock in its industry, for example, compare Infosys PE with Technology industry PE will give you the idea about the valuation of Infosys in its industry.

If Company’s stock PE is lower than Industry PE then Company is either Undervalued or Bad Performer (In Market View/ We are not talking about actual performance but what market expect from this share). Similarly when PE is high in comparison with industry PE, then the company is Overvalued or Good Performer.

A company even though making loss can’t have negative PE as negative PE is not allowed.

So basically you can’t judge on PE alone, we need to use it with other parameters to decide whether the opportunity is good or just a honeytrap.

 

Market Capitalisation:

Also known as Market Cap is the total value of all the outstanding share.

Market Cap = Market Price *  Total Outstanding Shares

There are three  categories in which stocks are divided based on MCap

  • Large Cap      MCap >  Rs 10000Cr
  • Mid Cap           Rs 2 Cr  <  MCap < Rs 10000 Cr
  • Small Cap       MCap < Rs 2Cr

Market Capital indicates the size of the company and also help us to see risk factor involved, as bigger the company lower the risk.

But do Market Cap tell us about the value also, the answer is NO.

As Warren Buffet said-

“Price is what we pay and Value is what we get”

A value can’t be found by just one parameter. It can only be found by the combination of various Indicators and by understanding the performance of the company.

 

Book Value:

Book value, in simple term, is the total worth of a company. If all its assets are sold and liabilities are paid.

Book Value  =  Asset – Liabilities

Maruti Suzuki balance sheet

Its a snapshot of the Balance sheet of Maruti Suzuki, As you can see, book value is increasing year on year basis from right to left.

Even Benjamin Graham in his book The Intelligent Investor told that if he had to choose blindly based on just one indicator. He will choose Book Value.

 

Face Value:

Face VAlue, Book Value

Face value, the value of the stock in the actual contract (stock are basically ownership contracts). It is fixed at the time of issuing or IPO but can change whenever stock split. We will talk about “the split” in later blog.

 

Price to Book Value Ratio:

P/B Ratio = Market Price per Share / Book Value per Share

Book value per share is Ratio of Book value to total outstanding share.

If company P/B is less than 1 then it indicates

  • Company getting a poor return on its assets.
  • Investor think that company’s asset are overvalued.

vice versa for opposite case.

P/B can be used with ROE to find the overvalued or undervalued stock.

  • Low ROE and low P/B indicate company is overvalued
  • ROE and P/B should increase simultaneously.
  • If there is too much difference among ROE and P/B , stay away from such stock.

 

1.5 years of experience in stock investment and still learning. I help wealthblog to understand beginner’s mindset, with the motto of delivering the best guidance to our beginner readers.

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